G'day folksBeen crunching some numbers on RFE on a Sunday...

G'day folks

Been crunching some numbers on RFE on a Sunday morning and thought I would share them with you in case there is some interest.

Firstly, I've compared RFE with AUT before (because I still see a lot of lessons for oilers like RFE following similar production growth footsteps that AUT has already taken), and would like to highlight another comparison.

There's been some comments about RFE's last couple of placements and the dilution, etc. I think it is absolutely necessary that the company obtain additional capital in its early production growth stages (of course we all question at what price thanks to the faceless 4 instos).

Three key questions for me are:

1. How effectively has RFE used that capital to fund growth?
2. When can we expect to see RFE become self-funding?
3. What does the growth outlook do for the valuation?

The comparison to AUT helps me answer Q1. Below are graphs for AUT and RFE respectively showing quarterly (5B statement) figures for drilling development costs and cash receipts from sales:

Note in both cases that cash receipts from sales of course lags cash spent on in-field development drilling (exploration is excluded). Not surprising. Note that in AUT's case, cash receipts are converging with drilling development costs 3.5 years after they started the development of their Sugrakane acreage in earnest. RFE is only 1-2 years into the development of its big river project.

Note however the additional comments included in each graph, which provide details of other funding by way of equity placements, farm-out (in the case of AUT) and debt placements.

The most interesting thing to me is that AUT diluted shareholder interests through both WI farm-out (acreage dilution by 25%) to Hilcorp/MRO and equity placements by 100% (202M shares out to 411M shares), the net effect being a dilution of shareholder interest per net acre of 167%.

In contrast, RFE over the last 2 years has increased its acreage by 40%, and diluted shareholder equity by 85% from 270M shares to 500M shares. The net effect is only a 32% dilution in shareholder interest per net acre.

Therefore my answer to Q1 is that RFE has so far been mre effective than AUT which I consider a benchmark for developing oilers.

Now let's look at Q2. I'm trying to anticipate what production will look like by the end of the 2014 FY (to enable a 12 month forward valuation). I have looked back at RFE's monthly operations reports and put together what I think is an interesting picture of RFE's production growth versus number of wells put into operation. I consider wells classified as "in testing" according to company terminology as in production but they are determining the IP rates. Nevertheless wells "in testing" contribute to production as to those already classified as in production.

On this basis, we can see readily from the montlhy operations reports the number of total (op & non-op) gross wells in production/testing:

Aug-12: 5
Sep-12: 5
Oct-12: 5
Nov-12: 8
Dec-12: 10
Jan-13: 16
Feb-13: 20
Mar-13: 23
Apr-13: 27
May-13: 29
Jun-13: 36
Jul-13: 40

Now the interesting thing is if we match the monthly avg gross production to the number of wells on line each month, we can calclate a figure for gross avg monthly production per producing/testing well. This pcture looks quite interesting, and is shown in the graph below:

Thus we can see what appears to be an equilibrium balance has been established between prodction decline in existing wells versus the production from new wells as they come on stream - for the last 7 months the avg gross daily production per gross well has been 65 boepd.

The early months in the graph were higher because there was only a small number of wells and (a) there had not been much decline in them at that stage and (b) each new well has a bigger impact when the number of total wells is smaller. On that basis (i.e. that the fresh production from each new well coming on stream will have a smaller impact on the total while the larger population of wells decline into the long steady-state production plateau), I think the average per well could decline somewhat to 60 boepd over the next 12 months (thats just a guess though).

Nevertheless, while that may look or sound bad, the company's stated drilling program will nevertheless achieve a significant increase in production between now and the end of FY 2014. It states that it will drill 38 gross wells in calendar 2013 and 56 in calendar 2014. This means it should drill 47 gross wells in the 2014 FY.

Taking the number of wells on line at the end of June 2013 (36) plus another 47 by the end of June 2014 (approx 4 new gross wells per month) gives 83 gross producing/testing wells by then. Based on the above average for gross production per well, it is possible to estimate gross production for the end of FY 2014 as:

At 60 boepd: 83 x 60 =
4,980 boepd (gross), 3,486 boepd (WI @ 70% of gross prod), 2,823 boepd (NRI @ 81% of WI)

Remember for June the company was achieving a NRI of 1,350 boepd and for July a NRI of 1,500 boepd.

Looking at the drilling program of 47 new gross wells for FY 2014, at a cost of $3.3M and a WI of 70%, this will cost the company $110M in development for FY 2014.

On the other hand, I estaimte the company cashflow situation to be:

Cash at end of June 2013 = $23M ($3M cash plus $20M on RBL)
Cash from placement = $47M
Netback from FY 2014 sales (at $40/boe and based on 4 new wells / month & production per avg production per well) = $40M

The above totals to $110M. I expect the BB on the RBL will be increased again in due course, probably by another $20M to $65M out of $100M as more reserves are booked. This provides a buffer of $20M.

The drilling program for 2015 & 2016 has 56 gross wells per year, which at 70% WI would cost $130M/year.

My guess is that if there is another CR/placement, it will not be until at least Q2 next year. So my answer to Q2 is that RFE may already now be fully funded for its stated drilling program.

Finally to Q3, my forward-looking valuation for RFE is on a EV/boepd basis, using:

60 boepd avg gross prod per well at June 2014 x WI% = 3,486 boepd

EV/boepd = $105K/boepd (baseline valuation) = $366M
less debt drawn by then ($45M) = $321M
divided by # shares (500M) = 64c

If EV/boepd = $150K/boepd (upside valuation) = $523M
less debt drawn ($45M) = $478M
divided by # shares (500M) = 96c

The above may all be pie in the sky, but to me the SP where it is is firstly underpinned by those that bought into the placement at 43c (I dont believe they are going to sell this lower) and secondly by the fundamentals which already on a 12 month forward-looking basis say its undervalued and will have to grow (unless Oklahoma is swallowed up by a masive earthequake or something) - and is the reason why our faceless 4 instos want to grab as many shares now as they can.

Cheers, Sharks.